If you have any appreciation for supply and demand dynamics in the stock market you are likely to flip through a chart or two throughout your day. In my case, I flip through hundreds of charts a day, sometimes thousands. These include stocks, commodities, Currencies, Futures, ETFs, Indexes, and all on multiple timeframes – daily, weekly and monthly charts. One that keeps coming up on my radar is the Nasdaq, both the Composite and the 100. The reason is because we’re now back up towards March 2000 highs. This was the peak before the crash that took place over the next 2 years. It took over 15 years just to get back up here. But now what? [Read more…]

Today I want to focus on an interesting chart that we haven’t brought up in a while. This is the relative outperformance we’ve seen from the growth stocks compared with the value names since the Fall of 2008. History might show that the US Stock market bottomed out in March of 2009. And if you only look at the S&P500 or the Dow Jones Industrial Average, this might be true. But let’s not forget that the majority of stocks bottomed out in the Fall of 2008 and the internals and breadth of the market improved well before March as well.

One of the improvements that we saw internally before the indexes themselves bottomed out was clearly seen as money went back into Growth and out of Value months before the market bottomed out. Today, unfortunately, we are actually seeing the complete opposite. We are now witnessing the shift back into Value and out of Growth.

Here is a chart showing the relative performance of the S&P500 Growth Index (red) compared with the S&P500 Value Index (blue). The S&P500 itself is held constant in green:

I hate to say this, but it looks clear to me that the reversion process has begun. We’re seeing money flowing out of the Growth names and into value. Some of the big components that make up the Growth Index ($IVW) include $AAPL $GOOG $MSFT $JNJ $QCOM and $AMZN. As money flows out of these guys on a relative basis, they are buying up the Value Index names ($IVE). A few of the top holdings are $XOM $GE $WFC $JPM $CVX and $BRKB.

Now remember, this rotation we’re seeing is strictly on a relative basis. This is S&P500 Value over S&P500 Growth. They can both go down together, it’s just that one will outperform the other. The way I see it, when money started to flow into growth over value, the internals of the market were improving in the 4th quarter of 2008, warning of an impending bottom. Today we’re seeing that spread peak and start to flip back into Value and out of Growth. Are we getting a similar warning about what the S&P500 will be doing soon?

I think so. We’re seeing similar bearish developments in the Bond Market and some potential topping patterns in the Nasdaq. The rotation into Energy lately is very typical of late cycle strength and also points to an end to this bull market in stocks. I’m a weight-of-the-evidence kind of guy. So I’m not of fan of the US Stock Market Averages up here.

I’d be careful being long only in the stock market. I think at best we should be positioned much more neutral in that particular asset class. I like the reversion trade here. Look at the list of Energy stocks, specifically the big integrated names. These are big components of the Value index and should continue to outperform going forward.

I’ll try my best to follow up on this chart soon.

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Late last week I was invited to come on FOX Business to talk about why I like Energy. The conversation temporarily shifted towards why I hate Technology, and my answer was simple. We are seeing the exact opposite action in both of these sectors. I like Energy because we’re seeing relative strength break out as prices hit new all-time highs. In Tech, we’re seeing relative strength break down as prices roll over.

Here’s what I mean. This is a weekly chart of Technology $XLK relative to the S&P500 $SPY. Look at all that support from 2009-2011 while momentum avoided hitting any oversold readings and remained in bull mode. Once $AAPL started crash (see here), it helped drag down the relative strength in this sector while momentum also hit oversold readings. This is a very bearish characteristic:

In the second half of last year, relative strength started to move higher but momentum failed to hit any overbought conditions rolling over in the 60s. This is text book bearish behavior. Meanwhile, prices of XLK/SPY are rolling over right around that former resistance from years ago. Our polarity principles tell us this is very normal as former demand has now turned into overhead supply.

For me to get back on the bullish train for Big Tech, we’re going to need to see that shaded area taken out. We really want to see the January highs in XLK/SPY taken out to the upside. I believe this is the lower probability scenario and would expect Technology to continue to underperform going forward.

This is not an area where I want to be as it tends to be a much more early cycle sector. I would prefer to be in late cycle sectors like Energy. If the data changes, I will certainly keep an open mind and adjust accordingly. But we have to react to what is currently in front of us, and it’s just not tech. I’d stay away or stay short.

Trades don’t get easier than this one. I like clean charts with clean entries and well-defined risks. Microsoft has all of those…

To start, here is a weekly chart showing the October 2007 highs at $37.50 before getting crushed. The stock lost 60% of it’s value over the next 15 months or so. After being boring for a while, it finally got a little rally, but only back to the 2007 highs. Now that everyone is excited about it (92% bullish sentiment according to Stocktwits) – I think it’s an obvious fade:

So now that we know it’s something we want to short, it’s all about the entry and defining the risk. On Wednesday $MSFT was able to temporarily rally above that key $37.50 level from 2007. But as prices inched higher, momentum was already rolling over. Here is a short-term look using 10-min bars. Look at the bearish divergence between price and the Relative Strength Index plotted below.

We have an easy out. I can’t put a new position on unless I have well-defined risk, no matter how much I love the trade. In this case, I think you’ve got options. You can use Wednesday’s highs as a stop or you can wait until we’re below 37.50 and use anything above that as the stop. You can even use the Wednesday morning pop highs in the 37.70s. It really all depends on your risk tolerance and time horizon.

Easy trade. Right or wrong I can hold my head up high knowing that we got a good entry point with an extremely advantageous risk/reward ratio. That’s all I can ask for.

Technician Carter Worth of Oppenheimer is out this week calling the S&P500 “Dead Money, at best”. I thought this was an interesting take on a large cap index comprised of 500 American companies. Remember, this is a cap-weighted index, making the largest companies more important than the others. As opposed to the Dow Jones Industrial Average that doesn’t care how big your market cap is, just the price of your stock.

“The thesis is a continuation of a view that began in late November. Worth reasons that the S&P 500, at best, is likely to remain stuck at the 1,400 – 1,430 level for weeks and might head back down to 1,350.

‘The primary issue we have with the market is the large and growing number of ‘Bullish-to-Bearish’ Reversals found among important super cap stock composing the S&P 500,’ said Worth.

Worth reviewed the chart patterns of a dozen of marquee names and points out that all have taken on ‘rollover casts’ with their respective smoothing mechanisms flattening or already sloping down.

With regards to the S&P 500 itself, the analyst described it as ‘walking the line [and] trying to maintain its uptrend.’

‘Any weakness in the intermediate period ahead and it becomes much harder to claim that the market’s upward trajectory is intact. We ourselves are skeptical,’ concluded Worth.”

He makes some valid points. But rather than taking this as a negative, I think we should maybe feel somewhat fortunate in that this is becoming more and more of a stock pickers market with each passing day. Remember 18 months ago? Very different. Remember 3-4 years ago, the Risk-on/Risk-off hysteria? Straight silly.

So some of these humongous companies may not look so good. Big deal. Some of the others do. And some smaller ones that aren’t even in the S&P500 look great. And some of the little guys look like garbage. How much more fun is this?

The big tech stocks are making serious moves right now. A couple of months ago I went over the reasons why I thought the Nasdaq100 was getting ready for a big breakout. The household names in the index are reporting their quarterly earnings so we’ll know soon if this is it or if we need a little bit more consolidation.

Bespoke Investment Group points out that the S&P Technology Sector is closing in on its 2007 highs – where were before the financial crisis began:

“The S&P 500 Technology sector has gotten off to a great start to 2012. While it has gotten a bit overbought in the short term, the sector is closing in on a key resistance level that bulls would love to see broken. This resistance level is the sector’s pre-financial crisis closing high of 441.36, which is just 1.59% away from where the sector is currently trading.“

The big components are going to be the key here: $AAPL $GOOG $MSFT $INTC $ORCL $AMZN $QCOM $CSCO – new highs in these names is what will take this index to the promise land. This is important because once key resistance is broken on a weekly basis for the Nasdaq100, that former resistance should become support in the future.

We’ll discuss that when the time comes. For now, we need to look out for head-fakes in the index. It’s pretty extended here after close to a 20% move since early October. Further consolidation wouldn’t be the end of the world.

***

Update: $GOOG down big in after market trading, $MSFT and $INTC higher – all 3 just reported quarterly earnings.

As a follow up to yesterday’s Nasdaq100 conversation, I wanted to add a few of more charts into the mix. In the post that I put up over at Marketwatch.com, we discussed a few of the major components that make up $QQQ, specifically, $AAPL, $CSCO, $INTC, $ORCL, and $MSFT. I could have kept going, but didn’t want to overdo it.

But hey, this is America, let’s overdo it. Here are 3 more for you:

The first one is Amazon ($AMZN): quick and simple. We’re going to put this one in the $AAPL category – both charts go from the lower left to the upper right. Tough to argue with.

The second one is a little bit more special. Google ($GOOG) has always been near and dear to my heart. Look how many times this $600-$625 level has been tested since 2008. That fixed level gives us a key area to watch for a breakout. Notice the higher lows that have lead up to the most recent tests of resistance:

The last one (I promise) is Qualcomm – $QCOM – this stock has been stuck in this 20 point range for about 6 years. You want to talk about a base? This stock has really been pushing the upper limits of the consolidation lately almost begging to breakout. Watch this one closely:

And there you have it folks. Do you want to know why the Nasdaq100 has the potential for a nice breakout from here? Because all of its major components are confirming it. Maybe it happens soon, maybe it takes one more test, but the set up is certainly there. Yesterday, we saw a ton of traffic coming from this particular post and I’ve never received so much hate mail. Almost no one agrees and most people think that I’m crazy for even hinting that the Nasdaq100 could go higher.

We’ll chalk that one up as another bullish sign for the Nasdaq. Thanks for the confirmation fellas.

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